When personal guarantees bite

It is common practice for financiers of yachts to seek a personal guarantee from the borrower’s beneficial owner(s) to guarantee the debts of the borrowing entity, which will invariably be a special purpose company whose only asset is the yacht.

In essence, if the borrowing company defaults on the loan, the lender may then call upon the personal guarantor to repay the debt.

“Lombard sought a bankruptcy order against Mr Blower as a result of his failure to perform his obligations under a guarantee and indemnity he had entered into in favour of the bank to secure the loan.”

The same often applies to the financing of business jets and the implications of the borrowing entity defaulting on the loan are also the same, as was demonstrated in the recent High Court case of Lombard North Central PLC -v- John William Blower. Mr Blower was the beneficial owner of the single purpose company, Four Seasons Aviation Ltd (‘FSA’), which entered into a loan agreement with Lombard for the financing of a Hawker 800 business jet. FSA defaulted on the loan agreement, the facility was terminated and two days later the jet was repossessed. Lombard sought a bankruptcy order against Mr Blower as a result of his failure to perform his obligations under a guarantee and indemnity he had entered into in favour of the bank to secure the loan.

The relevant clause in the loan agreement stated that any demand or notice under the guarantee ‘shall be made in writing signed by an officer of the lender’. Mr Blower contended that as Lombard’s demand under the guarantee was executed by the solicitors for Lombard and not an officer of the bank, the demand was defective. No other issue was raised with the demand.

“Personal guarantees should never be entered into lightly or without a full understanding of the risks to one’s personal wealth”

In her judgment, the judge, Amanda Tipples QC, noted the general common law rule that an agent may execute a deed or do any other act on behalf of the principal, which the principal might himself execute, make or do. The judge found that, on a proper construction of the loan agreement, there was no requirement that the letter of demand had to be signed personally by an officer of the bank. She found that the demand could be signed by an agent duly authorised to sign on behalf of an officer, namely the bank’s solicitors. There was no suggestion that the solicitors were not duly authorised to act on behalf of Lombard.

Mr Blower raised a number of other grounds of objection but ultimately he failed to persuade the court and the bank’s petition to have him declared bankrupt therefore succeeded, with the costs of the case to be paid out of the bankrupt’s estate.

Personal guarantees are a common feature of all asset-based lending in the luxury/personal sector, and this case highlights that they should never be entered into lightly or without a full understanding of the risks to one’s personal wealth in the event that the borrowing entity cannot meet its obligations in the underlying loan.